Q4 2022 Hess Midstream LP Earnings Call
Speaker 3: Good day, ladies and gentlemen, and welcome to the fourth quarter 2022 HESS Midstream Conference Call. My name is Tawanda, and I will be your operator for today.
Speaker 4: At this time, all participants are in listen-only mode.
Speaker 5: After the speaker's presentation, there will be a question and answer session.
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Speaker 9: Please be advised that today's conference is being recorded for replay purposes.
Speaker 10: I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. You may proceed. You may proceed.
Speaker 11: Thank you. Good afternoon everyone, and thank you for participating in our fourth-quarter earnings conference call. Our earnings release was issued this morning and can be found on our website, www.hesmidstream.com.
Speaker 12: Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws.
Speaker 13: These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.
Speaker 14: These risks include those set forth in the Risk Factors section of Hess Midstream's filings with the SEC.
Speaker 15: Also, in today's conference call, we might discuss certain non-GAAP financial measures. Reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release.
Speaker 16: With me today are John Gatling, President and Chief Operating Officer, and Jonathan Stein, Chief Financial Officer. I'll now turn the call over to John Gatling.
Speaker 17: Thanks, Jennifer. Good afternoon, everyone, and welcome to HESS Midstream's fourth quarter 2022 conference call. Today, I'll review our 2022 operating performance and highlights, provide details regarding our 2023 plans and outlook through 2025, and discuss HESS Corporation's latest results and outlook for Bakken.
Speaker 18: Jonathan will then review our financial results.
Speaker 19: Despite severe winter weather conditions, 2022 was a year of continued strong performance and execution for HESS Midstream. We delivered volume growth and expanded our compression capacity by more than 25%, further enhancing our gas capture capability.
Speaker 20: As discussed in our guidance release, we have established our 2025 minimum volume commitments, and are confident in the implied volume growth, which is underpinned by the following factors.
Speaker 21: First, HESS plans to continue operating a four-rig drilling program and expects to bring approximately 110 wells online per year in 2023 and 2024.
Speaker 22: This will grow HESA's production to an average of approximately 200,000 barrels of oil equipment per day in 2025.
Speaker 23: Second, HESS has an approximate 15-year inventory of profitable drilling locations with a four-rig program at $60 WTI.
Speaker 24: And finally, HESS Midstream's Focused Capital Program prioritizes the expansion of our gas gathering system to support gas throughput volumes increasing by more than 30% in 2025 relative to 2022, driven by HESS's planned development activity.
Speaker 25: goal of achieving zero routine flaring by the end of 2025.
Speaker 26: We're also confident in the delivery of our financial guidance and the potential to provide incremental shareholder returns above our targeted annual distribution growth as our revenues are 80 to 90 percent covered by MVCs through 2025.
Speaker 27: And the significant growth in gas volumes, which is supportive to our midstream, as approximately 75% of our revenues are generated from our gas business.
Speaker 28: Now turning to HES upstream highlights.
Speaker 29: HESS announced Bakken net production averaged 158,000 barrels of oil equipment per day in the fourth quarter, reflecting severe winter weather impacts in December , which limited bringing new wells online to 15 for the quarter.
Speaker 30: For the full year 2022, BAC's net production averaged 154,000 barrels of oil per day.
Speaker 31: Now turning to HESA's production guidance."
Speaker 32: For the full year 2023, Hess forecasts block and net production will average between 165 and 170 thousand barrels of oil equivalent per day, a 9% increase compared to 2022.
First quarter net production is forecast to average between 155 and 160,000 barrels all of them per day, including weather contingencies and carryover effects from December .
HESS forecasts bac and net production to steadily grow over the course of 2023 and 2024 and and average approximately 200,000 barrels of oil equipment per day in 2025.
has expects to hold this level of production for nearly a decade.
Now focusing on HESS Midstream's fourth-quarter 2022 results.
Gas processing volumes averaged 312 million cubic feet per day, reflecting the impact of severe winter weather in December.
fourth quarter crude terminaling and water gathering volumes averaged 101,000 barrels of oil per day and 77,000 barrels of water per day respectively.
Resulting in a full-year adjusted EBITDA of $983 million, representing an increase of 8% compared to 2021.
Turning to HESS Midstream's guidance. For the full year 2023, we expect gas processing volumes to average between 350 and 360 million cubic feet per day, representing growth of approximately 11% compared to 2022, primarily driven by HESS's development activity and our focused gas capture efforts.
For full year 2023, we anticipate crude terminally volumes to average between 105 and 115,000 barrels of oil per day and water gathering volumes to average between 85 and 95,000 barrels of water per day.
We project adjusted EBITDA for 2023 in the range of $990 million to $1 billion, $30 million, an increase of approximately 3% at the midpoint compared to full year 2022.
The adjusted EBITDA increase driven primarily by the transition from high MVC coverage to physical volume growth, which is underpinned by full impact of HESS's four rig development program.
Turning to HESS Midstream's 2023 capital program.
For the full year 2023, capital expenditures are expected to total $225 million, comprising $210 million for expansion activity and $15 million for maintenance activity.
Approximately $100 million of the 2023 expansion capital budget is allocated to gas compression, with activities focused on the completion of two greenfield compressor stations and associated pipeline infrastructure. These are expected to provide, in aggregate, an additional 100 million cubic feet per day of gas compression capacity when brought online.
further enhancing our gas capture capability.
Approximately $110 million is allocated to gathering system well connects to service HESS and third-party customers and optimization of our existing gathering system.
In summary, we are continuing to execute our strategy of making focused, low-risk investments to meet base and demands, delivering reliable operating performance and strong financial results.
We are well-positioned for substantial growth, as implied by our guided 2025 MVCs, which are underpinned by HESA's planned development activity and our continued focus on gas capture. This is expected to result in sustainable excess cash flow generation and the potential to return additional capital to our shareholders.
I'll now turn the call over to Jonathan to review our financial results and guidance.
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A few years ler.
We're going to do Gatling again, yes?
Thank you.
Okay so...
Okay everybody, sorry about that. We're going to pick up where we just left off with Jonathan Stein. Over to you, Jonathan.
Thank you, and good afternoon, everyone.
Today, I will summarize our financial highlights from 2022, discuss our recently completed nomination process with HESS, and provide details on our 2023 guidance and outlooks through 2025, including our continued prioritization of ongoing and incremental return of capital to shareholders.
For 2022, we delivered strong results, with full year net income of $621 million and adjusted EBITDA of $983 million, an 8% increase compared to the prior year. Looking forward, we have line of sight to at least 10% annual growth in net income, which'll indicate start by late 2020.
adjusted EBITDA, and adjusted free cash flow in 2024 and 2025. Driven by HESS's growth in the Bakken and underpinned by our 2025 MVCs that provide visibility to approximately 10% annualized growth in physical volumes across gas, oil, and water systems from 2023.
Return of capital to shareholders continues to be a key priority for our financial strategy. In 2022, we increased our distributions per share consistent with our 5% annual target and also completed incremental shareholder returns, including a $400 million repurchase of units from our sponsors.
and an additional increase in our distribution level by 5% following the repurchase. As a result, over the past two years, we have completed $1.15 billion of unit repurchases and grown our distributions by approximately 27% on a per share basis.
These shareholder returns as a percent of market capitalization represent differentiated and peer leading metrics.
Looking forward, we plan to continue this financial strategy that includes consistent and ongoing return of capital as a primary objective. We are targeting 5% annual distribution growth through 2025, and we expect greater than $1 billion in financial flexibility.
through 2025 for capital allocation that includes prioritization of potential unit repurchases on an ongoing basis.
Turning to our results.
For the fourth quarter, that income was $150 million, compared to $159 million for the third quarter.
adjusted EBITDA for the fourth quarter with $245 million compared to $254 million for the third quarter.
The change in adjusted EBITDA relative to third quarter was primarily attributable to the following.
Total revenues, excluding pass-through revenues, decreased by approximately $15 million.
primarily driven by lower throughput volumes from extreme winter weather as John Gatling described, partially offset by higher MVC shortfall fees, resulting in segment revenue changes as follows.
a decrease in gathering revenue of approximately $13 million, a decrease in processing revenue of approximately $1 million, and a decrease in export revenue of approximately $1 million.
total cost of expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings.
decreased by $6 million due to lower remediation expenses related to a produced water spill in a gathering segment during the third quarter.
resulting in adjusted EBITDA for the fourth quarter of $245 million.
Our gross adjusted even a margin for the fourth quarter was maintained at approximately 80%, highlighting our continued strong operating leverage.
Fourth quarter made this capital expenditures were approximately $4 million and that interest excluding amortization of deferred finance costs were approximately $38 million.
The result was that distributable cash flow was approximately $203 million for the fourth quarter, covering our distribution by 1.5 times.
Expansion capital expenditures in the fourth quarter were approximately $59 million, resulting in adjusted free cash flow of approximately $144 million.
At year end, debt was approximately $2.9 billion, representing leverage of approximately three times adjusted EBITDA on a trailing 12-month basis. We had a drawn balance of $18 million on a revolving credit facility at year end.
Turning to our annual nomination process.
Our contracts continue to provide a unique and differentiated level of downside protection through a combination of our annual rate redetermination process that maintains a contractual return on capital deployed and MVCs that provide revenue floors set at 80% of expected throughput three years in advance.
We have commercial contracts with HASS with downside protection through 2033.
At the end of 2022, we completed our nomination process with HESC and updated our tower frames for 2023 and all forward years.
As with prior cycles, the nomination process considered changes in actual and forecasted volumes and capex to maintain our contractual targeted return on capital deployed.
2023 tariff rates were generally slightly higher than 2022, reflecting the annual inflation escalator.
As a reminder, 2023 is the final year of the annual rate re-determination process for the majority of our systems that represent approximately 85% of our revenues.
At the end of 2023, the base rate for 2024 will be set based on the average of the tariff rate from 2021-2023 adjusted for inflation.
Rates will then be increased each year based on an inflation escalator capped at 3%, resulting in steadily increasing rates through 2033. For our terminal and water gathering systems, they represent approximately 15% of our revenues.
We will continue to reset our rates through our annual rate re-determination process through 2033.
For all of our systems, MVCs will continue to be set at 80% of nominated volumes, set three as an advance, providing downside protection through 2033.
In our guidance release this morning, we provided MVCs for the years 2023 through 2025. As part of the nomination process, MVCs for 2023 and 2024 were reviewed and, where required, increased, while MVCs for 2025 were newly established.
based on 80% of the nominated volumes to each system in that year.
For our oil revenues, our NVCs are expected to provide approximately 100% revenue coverage in 2023 and 90% revenue coverage in 2024.
For our gas revenues, our NVCs are expected to provide approximately 85% revenue coverage in both 2023 and 2024.
Our MVCs for 2025 provide line of sight to long-term growth in system throughput. For example, looking at gas processing, HESS's nomination for expected volumes for 2025 was 429 million cubic feet per day, resulting in an MVC of
of 343 million cubic feet per day set at 80 percent of the nomination level implying more than 30 percent growth in physical natural gas volumes from 2022 levels.
Thank you for your guidance for 2023.
While physical volumes are expected to grow in 2023, as John described, we are transitioning from higher MVCs in 2022 to physical volumes that are at or above MVCs in 2023. As a result, our revenue growth in 2023 is expected to be driven by our rates.
that have been increased primarily as a result of the annual inflation adjustment as described earlier.
For the full year 2023, we expect net income of $600 to $640 million.
an adjusted EBITDA of $990 to $1,030,000,000, representing a 3% increase in adjusted EBITDA at the midpoint of our range.
We continue to target a gross adjusted EBITDA margin of approximately 75% in 2023.
For 2023, with total expected capital expenditures of $225 million, we expect at the midpoint to generate adjusted free cash flow of approximately $625 million.
Highlighting our financial strength, we expect distribution coverage of approximately 1.5 times and adjusted free cash flow of approximately $60 million after fully funding our targeted growing distribution.
We also expect to repay the 2022 year-end balance of $18 million on our revolving credit facility in 2023.
For the first quarter of 2023, we expect net income to be approximately $135 to $145 million and adjusted to EBITDA to be approximately $230 to $240 million.
First quarter maintenance capital expenditures and net interest, excluding amortization of deferred finance costs, are expected to be approximately $45 million, resulting in expected distributable cash flow of approximately $185 to $195 million.
delivering distribution coverage at the midpoint of the range of approximately 1.4 times.
For the remainder of 2023, we expect growing adjusted EBITDA consistent with increasing volumes across oil, gas, and water systems with seasonally higher operating costs in the second and third quarters of the year.
Looking beyond 2023, we have clear visibility to volume, adjusted EBITDA and adjusted free cash flow growth that supports our financial strategy.
As described, our MVCs provide visibility to annualized growth of approximately 10% across our oil, gas, and water volumes.
With continued investment supporting increasing gas capture, our gas volumes have the highest expected physical growth rate and represent approximately 75% of our expected revenues.
Trimmed by these growing volumes, together with fees that are steadily increasing based on our annual inflation escalator and operating leverage based on a targeted growth adjusted EBITDA margin of approximately 75%, we expect growth in adjusted EBITDA of at least 10% per year in both 2024 and 2025.
With growing adjusted EBITDA and capital expenditures that are expected to remain stable with 2023 levels, we expect growth and adjusted free cash flow of greater than 10% on an annualized basis in both 2024 and 2025.
Our financial strategy, supported by the significant growth in our financial metrics, includes a continued focus on financial strength, with a long-term leverage target of three times adjusted EBITDA. In addition, we are continuing to prioritize shareholder returns with our return of capital framework.
First, we are continuing to grow our base distribution by extending our targeted distribution growth of 5% annually on a per share basis through to 2025, with annual distribution coverage of at least 1.4 times.
Second, we have financial flexibility for potential significant incremental shareholder returns beyond our growing base distribution.
With expected adjusted EBITDA and adjusted free cash flow growth of at least 10% annually in excess of our targeted annual distribution growth of 5%, we expect to generate excess adjusted free cash flow beyond our distributions and leverage is expected to decline.
to below 2.5 times adjusted EBITDA by the end of 2025, providing leverage capacity relative to our long-term three times adjusted EBITDA leverage target.
As a result, with a growing cash balance and significant leverage capacity, we expect to have greater than $1 billion in financial flexibility through 2025 for a capital allocation that includes prioritization of unit repurchases on an ongoing basis.
In summary, we are pleased to have delivered a strong 2022 and look forward to a visible trajectory of growth in our operational and financial metrics that underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks. We'll be happy to answer any questions.
I'll now turn the call over to the operator.
turn the call over to the operator. Thank you.
Ladies and gentlemen, as a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Doug Irwin with Citi. Your line is open. Doug Irwin. Thank you,
Hey, everyone, thanks for the question. Maybe just starting with capital allocation.
I'm just trying to ask how you're thinking about the cadence of the potential billion dollars in returns. Should we expect it to be pretty rateable over the next few years or do you plan to be a little more opportunistic? And to that point, I guess would you be willing to kind of move above your three times leverage target to return capital kind of more near term if you have a pretty good line of sight to...
And as I said, we expect leverage to be at 2.5 times by the end of 2025. So with a half a turn of EBITDA based on that growing EBITDA growth, that gets you to at least $600 million there. We also noted that we're going to be free cash flow positive after distributions as our EBITDA is growing and our CapEx is stable.
is targeted as a potential retarget for just unit repurchases or share repurchases and does not include potential dividend step-ups and dividend level increases as we've done after each of the share repurchases in the past. Those are funded primarily through the fact that our share repurchases end up with lower share count.
over the period starting this year and then really on an ongoing basis through 2025 to be able to utilize that billion dollars in really just multiple potential buybacks and then potentially related distribution level increases that would come with that as well beyond our 5% distribution growth.
Now that brings us finally to our leverage and as you know there's no change to our three times long-term target, but if you look at what we've done in previous transactions, we have gone slightly above that three, let's say in past 3.2, based on visibility of getting back to our long-term leverage target three times.
We expect that as we execute multiple opportunities over the next, starting this year and then through 2025, that we continue that same strategy. And particularly with the visibility that we have through our 2025 MBCs driving our expected growing EBITDA.
We feel confident that as we execute these multiple potential share buybacks over this period that we could go slightly above that three times with visibility to getting back to our long-term three times targeted leverage. Again, we're really excited about this program with a billion dollars in capacity. As we noted, we've really had peer-leading metrics in terms of share…
And then as we kind of think about the 10% growth in both 24 and 25, is that pretty much all driven by MBCs and the HESS outlook or does that kind of assume some third party volume in the HEP-BECs as well?
Yeah, so the third party, we've been staying consistent with our third party assumption, which is about 10% for both oil and gas. You know, with our strategic infrastructure and our position in the basin, we obviously can attract volumes into the infrastructure.
And we're gonna continue to focus on that, but as we've seen over the last year or so, it's been in the kind of the 10% range. And that's essentially what we're planning for into the future. And so as we talk about the growth and kind of transitioning above NBCs heading into 2025, we expect that to be about the same.
Our next question comes from the line of John McKay with Goldman Sachs. Your line is open. Your line is open.
Hey, everyone. Thanks for the time. I wanted to pick up on Doug's first question just on the billion dollar potential incremental cash returns.
Could you talk a little bit about maybe just, you know, it's a billion dollars of potential, maybe just some of the puts and takes on actual kind of willingness to deploy that? Because if we look at a billion dollars that's 15% of your market cap or something right now. That's a pretty big number.
Is that someone dependent on share price? Could it swing more towards larger distribution increases? I was trying to think of the puts and takes on us actually kind of seeing that $1 billion come out over the next three years.
Sure. So in terms of, you know, capital allocation, in terms of our willingness or focus on that one billion and what it's for, you know, as we said, really the focus of our financial strategy is really on, of course, maintaining our financial strength.
but in terms of our leverage target, but also prioritizing return on capital. We're very fortunate that, as we've talked about with the investments we've made historically, we can really get this 10% per year, even in growth and volume growth as we described, really on just stable capital. So there's really at least nothing, of course, as always.
We've talked about bulldogs in the past, but absent anything like that, there's really nothing in our plan, we certainly don't need any of that in order to be able to achieve the growth that we already have in our plan. So with that said, then that billion dollars, the prioritization of that would be for returning capital to shareholders.
Of course, everything, you know, every transaction would be subject to market conditions and board approval at the time, but that is the priority in the financial strategy that we've laid out. In terms of share repurchases versus dividend increases, of course we'll make a decision at the time, but we, you know, we do have gotten very positive feedback and we're very positive ourselves on the strategy we've executed so far.
before the repurchase and that has allowed us to, as I mentioned in my comments, generate not only the 5% annual growth but now over the past two years, 27% increase in our dividends, just an amazing result there together with the $1.15 billion in repurchases. So I'd say that's going to be our focus, that's our priority.
you know, of course, we'll make decisions each time on what the exact right optimization is in terms of capital structure, but certainly the strategy that we've taken so far is certainly one that we like and certainly that would be probably our base case going forward. And again, multiple opportunities to do this going forward through now through 2025.
All right, that's great.
maybe just turning to operations. I mean, like there's always gonna be weather up in the Bakken. December was really bad. It was also really bad earlier in 22. I guess this is a little more of a Hess question, but maybe could you just talk a little bit around.
your comfort in not getting pushed to the right again when there's bad weather again up there. I mean, you commented that your guide and the HES guide are.
I guess, weather adjusted or there's some give in there for weather, but maybe just how much conservatism you have in there and how you're thinking about it going forward and whether it's maybe evolved over the last year or two.
Yeah, thanks. I mean I think it's somewhat difficult to say. I mean obviously North Dakota there's weather every year. It snows every year, you know, starting sometime in October-November timeframe and it kind of carries on through, you know, through March-April timeframe and sometimes into May.
2022 is definitely challenging. It was abnormal weather two times. I mean it kind of struck twice in one year. We had the freezing rain earlier in the year in the April-May time frame and that just...
totally took out power and without the power you know we obviously couldn't we couldn't lift the the hydrocarbons and couldn't get it to the infrastructure and ultimately to be processed and and and shipped out via pipe or rail or you know where to the to the export markets
So that was the challenge at the beginning of the year. And then in December , we just had abnormally high snowfall and then very, very cold weather. And so as the team, as the upstream team attacked the snow with winds and very cold weather, the snow would just blow back and it was a constant.
they do build in weather contingencies in the first quarter and the fourth quarter of every year. They're really based more on historical weather contingencies and not abnormal. I would say that based on what we saw in 2022, we're probably a little bit gun-shy here going into the first quarter of this year.
But again, we're going to continue to monitor it and I mean the team is doing a great job trying to stabilize the system and really reinforce it for even abnormal weather. So we feel like we've got a good plan. We've got a very integrated team between the upstream and the midstream.
We have good transparency and visibility into the forecast and understand kind of where the plan is and what we need to do to help them achieve it. So I would say that both HESS and HESS Midstream are confident in the delivery, in particular as we march towards the average of 200,000 barrels of oil per day in 2025. And I think that's going to be the next step in the future.
the real anchor point to the growth over the next three years. So we see solid growth in 23, 24, and into 25. And then there's a lot of opportunity there. So again, I know it's a little bit of a long-winded response to your question, but the weather in 22 was abnormal and challenging for the team.
Really, Thoreau, appreciate it. Thanks everyone for the time today. Yeah, absolutely.
Really thorough, appreciate it. Thanks everyone for the time today. Yeah, absolutely. Thank you.
I'm showing no further questions in the queue.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.
and 90% revenue coverage in 2024. For our gas revenues, our NVCs are expected to provide approximately 85% revenue coverage in both 2023 and 2024. Our NVCs for 2025 provide line of sight to long-term growth in system throughput. For example, looking at gas processing, HESA's nomination for expected volumes for 2025 was 429 million cubic feet per day, resulting in an NVC of 343 million cubic feet per day, set at 80% of the nomination level, implying more than 30% growth in physical natural gas volumes from 2022 levels. Turning to guidance for 2023. While physical volumes are expected to grow in 2023, as John described, we are transitioning from higher NVCs in 2022 to physical volumes that are at or above NVCs in 2023. As a result, our revenue growth in 2023 is expected to be driven by our rates that have been increased primarily as a result of the annual inflation adjustment as described earlier. For the full year 2023, we expect net income of 600 to $640 million, and adjusted EBITDA of 990 to $1 billion, $30 million, representing a 3% increase in adjusted EBITDA at the midpoint of our range. We continue to target a gross adjusted EBITDA margin of approximately 75% in 2023.